219: Edwin Dorsey – Critical Reporting—A Good Guy Flagging Bad Companies

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Hey crew, what's up and welcome to episode 219, featuring Edwin Dorsey. Edwin's a young gentleman from NYC with a passion for exposing bad companies. He's an individual investor and he writes the Bear Cave newsletter. He was also really fun to chat with on a range of topics, such as who do you trust more, someone publishing short research with or without a vested interest?

tactics of bad actors in the short world, misconceptions about the mechanics of short selling, Edwin's research process and where he digs for juicy information, Types of companies where wrongdoing is most prevalent and how it often goes unchecked for so long. Then at the end, Edwin flips directions, laying out a case for why he's bullish on Twitter. Now just two things I should mention before we get started. This interview was recorded after the US close, sixteenth of june twenty twenty one.

Second, commentary on stocks mentioned in this episode is opinion only and not to be treated as buy or sell recommendations.

Alright, and that is everything I've to say. Here is my guest, Edwin Dorsey. You know, I watched one of your videos Last night, just in doing a little bit of preparation for our conversation, and I watched the video or the interview you did with uh Mark Cahotis. And I couldn't help but notice like your personality versus his personality is just

almost like the complete opposite. You know, like I I look at you, you seem to me as like quite a friendly, upbeat, positive fella. And then you look at Mark Cahotis and you can kind of see like, you know, he's been in the market for so long. You know, he's been through years of battles and it's it's almost like sort of taking a toll on him a little bit, like he takes everything very personal as he says. It's kinda grind him down a bit.

Do you ever pause and think, you know, what the hell have I got myself into? What am I in for? You know, I I think short sellers as a group, you know, it they tend to be a little lonely, a little sad. Uh Mark says you age in dog years, so you age really fast. Um So so so I try to avoid that. The the way you avoid that is by not looking for the bad everywhere all the time and not taking things too personally.

Um so so having an upbeat personality, talking to great people, looking at great things. I watch a lot of interviews with Jeff Bezos and Steve Jobs and Warren Buffett. You know, i if I was a hundred percent focused on a few companies and years long vendettas trying to expose wrongdoing, I I think you'll just you know, put yourself into a tailspin. But i if you're positive and you look for the good in the world, uh I think tha that that's better in the long run, even if you are a short seller.

Yeah. How did you actually come to link up with Mark? So it it's funny. Uh I've been passionate about stocks for a really long uh time, Aaron, from like second grade onwards. And then freshman year of college, you know, once somebody in the hedge fund world linked me to Mark. and said, Hey, you should meet with him. Um, you know, he's a big guy. He knows a lot of things.

So I I I called I called him and he was originally really gruff, but we were started talking about stocks and then I took an Uber up to his chicken farm in Northern uh California and and we kind of hit it off. We talked for two hours about the short world. He made me make a Twitter account right then and there and then tweeted about me to get me my first 300 followers or something like that.

Uh and and he was huge with introductions, huge in helping me set up a Twitter presence. That he he he was a really big person early on in and helping me learn and meet people. Oh that's very nice. I'll just pick up on that point you said someone in the hedge fund world made the introduction for you. I mean, how did you come to know someone in the hedge fund world in the first place? Uh so Aaron, the it's actually a long string of introductions.

It was my high school principal introduced me to a hedge fund manager who worked across like across across from where our school was. And I met with him. And then he had a son and his son's roommate was into the interested in the short world. It's a guy named Chris Strauss, who's really young and really smart and I like a lot.

So then I talked to him and then Chris and I stayed in touch and then Chris introduced me to Mark when I when I went out to California. And that's kind of the the you know the first part of the string of introductions. And it's kind of cool because that

First introduction from my high school principal to this hedge fund guy in Rochester really is what led to a ton of introductions down the road. Because if everyone introduces you to three people, it compounds really fast and soon you know everybody.

Yeah, that is a long string of introductions. That's really funny. Um, and the reason I asked that question is because I have a lot of listeners who are you know, would like to meet someone who's a bit higher up or or, you know, a talented trader, etc. Um, and you know, often don't really know

how to go about that. And obviously I don't want everyone to go out there and hassle Mark, but it's just like, you know, I'm always curious as to how you actually, you know, got introduced and found someone who, you know, provided you with a little bit of mentorship. I actually have a few funny stories when it comes to meeting people. Like uh I I wrote Warren Buffett so many letters trying to meet with him that eventually his secretary.

sent me an email saying you gotta stop sending letters or you you can't just show up. He's not gonna meet with you. Um like I I when I was younger, you can't do this when you get older, but when I was a freshman in college, I would just randomly show up at hedge funds offices and asked to meet with somebody there to pitch stocks. And you know, that that worked a little. I a after a certain age, that's kind of weird. But when you're a freshman, you can get away with it.

Um, I I've cold emailed like hundreds of people. Now even now every day I try to cold email someone I find interesting to meet with them. Um So I I found the key is you just need to like, you know, take five minutes of initiative to reach out, keep it really short, show that you're smart. And most people are very open to it. Right, right. I guess you don't know unless you try, eh?

What actually drew you into short research? Uh so it's it's tough to say, but for me, uh it was beginning of freshman year. I met with Mark and I met with another big short seller named Jim Carothers. Both of them were early mentors. And I like to joke, if the two people I'd met freshman year of college are big private equity people, I'd be here talking about private equity. If I'd met two great microcap investors, I'd be here talking about microcaps.

But I just happened to meet two of the greatest short sellers, uh, freshman year of college. And, you know, that that's what drew me to shorts.

And it seems like you've built credibility in the space reasonably quick. I mean, how so? Why do you think this is? Yeah. So Aaron, I'm twenty three. I'm one year out of college. The thing that I think gave me a lot of credibility, at least online, was there was this company called Care.com. How do you know about Care dot com, Aaron? I only know about it because I've obviously listened to a couple of the podcasts you've done and I've heard you speak about it. But yeah, continue.

So care.com, it's the largest babysitting platform in the US. Uh babysitters go on there to find babysitting jobs. Parents go on there to find babysitters. It's kind of a marketplace for babysitters. And and the most important thing for a babysitting platform is safety. You've got to vet the caregivers and make sure they are who they say they are and make sure they don't have a criminal history.

And care.com claimed to be doing all these background checks, but I had a friend who said, hey, the skit's the site's sketchy, you should check it out. I looked for lawsuits against care.com and I noticed there was a bunch of them. Uh and that was kind of a red flag to me. Uh so I decided to t check out the site's safety projector.

screening for myself and I tried to sign up as Harvey Weinstein and I was approved, even though they said they were gonna run a background check and all that. And I was like, hmm, you you really aren't vetting these people if Harvey Weinstein can get on the site. So I documented all that. I put out a report saying, hey, care.com has these safety issues and also they're kind of misleading on these investor metrics. And it went semi-viral.

uh the co-founder of the company called Stanford and Stanford made a big deal out of it and said, oh, you violated our Wi-Fi policy in doing this, you need to take your article down. And of course I refused. Stanford's like you can't research care dot com using Stanford Wi-Fi anymore.

And of course, that's exactly what I did. And I kept researching the company. I filed FOIA requests with every state attorney general for consumer complaints against care.com. And I ended up getting around 600 pages of consumer complaints against the company.

showing everything from like auto billing, overcharging, making it diff difficult to cancel and a lot of other safety issues that users had highlighted. And I kind of took all that, put it in an even bigger report and started tweeting that out. Um, and that's when I got real attention. And to make a long story short.

Um, about a year later, the Wall Street Journal starts to get involved. They poke around and they end up publishing a front page story on the safety issues at care.com, very similar to what I had highlighted, except they were able to go in more depth. I was quoted in the article, and that kind of gave me credibility because my first big play, my first big research project, you know, ended up being right and the CEO, CFO, general counsel.

I'll resign, the stock got cut in half, and then IAC acquired it and really tried to fix the safety issues.

That's good that you were credited in the Wall Street Journal article uh a year later or whenever that came out. Uh so yeah, I've heard you speak about this care.com case uh and and other podcasts you've done, and I made a point here to ask you. You know, what came after that? Well, like what was next? Like how did you demonstrate that you weren't just a a new one hit wonder or even proof to yourself that the first time it wasn't just a fluke that you could back this up? What what followed?

Hmm. I don't know if there was one distinct thing that really stood out after that. I talked a fair amount about Malincrot, this pharmaceutical company that their main drug, the price of it had gone from forty dollars in two thousand one to forty thousand dollars today, and they were doing some shady stuff with that, that also went bankrupt.

Uh, I noticed I enjoyed it because you get this kind of activism component where you're actually changing things if you're going out and putting out real research while on the long side, um, you know, I don't know if that's necessarily true. Uh The other thing that really helped me and I think gain helped me gain credibility is throughout college, on and off for all four years, I interned at SOFOS this.

big short only hedge fund. They weren't involved in any of the care dot com stuff. That was just my own side project, but they they kind of taught me how to look at bigger companies and how to do real research. So I think that combined with the care.com thing, you know, g gave me confidence and gave me credibility. Uh Mark also, you know, blasting me on Twitter helped and I would just share like interesting things I'd find on Twitter and that would help me as well. Okay.

So with regards to your research and the reports you put out, it's quite interesting, like you're in a y somewhat of a unique position, I think, because Most people who publish short research, they themselves have short positions in that stock. Therefore they have like a financial incentive for the stock to fall, for the stock to go down. Whereas you publish short research but you have no position. So

Essentially, you know, you don't have an incentive for that price to fall, but you also don't have like skin in the game. So if it goes up, you know, it doesn't really hurt you. Whereas like Activist short sellers who have a position like They kinda they're almost like putting their money where their mouth is, but then they

It's also like how much can you trust them because they have a financial incentive for that stock to fall. So it's like, you know, I don't know which one is better. Like each angle kind of has its pros and cons. I mean, do you have an opinion on this? Yeah, the first thing I'd say, I write the Bear Cave newsletter. I I wouldn't go as far as to say the the uh the newsletters I send out are

Activist short reports. Usually it's about a thousand words where I'm trying to highlight a company that's either misleading investors or misleading customers. The goal is that somebody would read the content that they pay for in my newsletter and say, huh, that's interesting. I didn't know about it. And now I'm going to use that as a springboard to start my own short research and I'll have like the first half of a thesis done or like

the first four innings of research done. So I wouldn't say I'm as like comprehensive as recommending shorts. It's more like highlighting problems at the market or angles the market is missing in companies. I I do think there's a problem with these activist players where you you do lose a lot of credibility if you come out and you publish a report and then you buy it up right after you publish and send the stock up.

uh after you you publish something. But I think the market's pretty good at recognizing who the bad actors are when it in the activist short world and who who who plays more long term. Um, because you can just see it in the performance of the companies around when they publish short reports. So so I I I think you you you have a lot of credibility if you do it my way where you're not trading it.

Um, you have a lot of credibility if you take a big position ahead of time, but also keep it for a while. I think you lose a lot of credibility if you're putting out stuff frequently and covering it the day you publish. And then you'll see these names with the big new short report up 7% on the day somebody puts it out. And then everybody knows, hey, that guy was just covering the day up. Uh, and I think that really hurts somebody's credibility.

Yeah. How come you don't take positions uh in the stocks you report on? I know you just said that they're not like a full comprehensive you know, short report, but um, you know, when you do find some of these issues, um, how come you are not taking short positions yourself? So a few things. The biggest is these aren't just outright short recommendations. The second is even the best short sellers, like if you look at Jim Chanos, I think his short book

has on average risen like 1% a year over the last 35 years. You just don't make a lot of money if you're you're actually trying to do it intellectually honestly and you know play the short. Over a long period of time. It's tough to do that from a portfolio perspective and make a lot of money. Third is I don't have a huge initial capital base.

So I think I'll earn more just doing subscriptions rather than like toying around with my money and seeing if I can all make twenty or thirty or fifty percent, you know, because I I was just out of college. Um, I think it's also tougher to say, hey, sign up for my paid newsletter service where I'll just be like sharing these ideas that I'm trading anyways. I think some people might be hesitant to do that. I'm not ruling out that I'll never trade the names in the future.

It's all it but it to me it's you gotta pick one of two models. If you're trading the names, you want it to be as public as possible. You don't want to pay Wallbies, you want everyone to see it. So the ideal disseminate faster. While if you are charging for your articles.

you you probably um don't want to be trading it because the reach just isn't gonna be huge. Like when I send out an email to all my paid subscribers, it might get it's like a thousand views, but it's not getting seen tens or hundreds of thousands of times. Yeah, that's a very good point. And that other point you made about how it's It's quite difficult to make money as uh an ethical uh short investor. Why do you think that's the case?

I just over time, Aaron, the market's risen like 9% a year over the last hundred years on average. So you're fighting against that current. Uh i if you say, hey, I'm gonna go 150% long and 50% short, then you you'll be able to make money. But if you if you're just saying, hey, I'm gonna run a short only portfolio, in order to break even, you need to be generating. nine percentage points of alpha. So that's a pretty high hurdle to be.

Uh I think also now that there's more short sellers out there and people have become more sophisticated is there's like less layups. If there's something that's obviously overvalued or is obviously gonna be going to zero in five years, usually it's heavily, heavily shorted. So the borrow cost is gonna be high and there's gonna be a lot of squeezes along the way. So you're gonna need to make the position small. Um

Th th those two factors uh I I think are the big thing. Having a nine percent hurdle rate to beat and just the fact there's more shorts out there so everything's more crowded makes it more difficult.

Can we just pick up on the bad actors in the short activism space? Like what are some of the tactics that activist short sellers use which you consider to maybe be unethical. Like do you take issue with the approach of certain short sellers? I know before you you specifically stated that there are some who will cover into their reports. Um, but you know, is there anything if we go a little deeper than that, which you take issue with?

You know, Mark Cohotes has very actively talked about it. There was this gr interesting article on Institutional Investor by Michelle Solerier that talks about how some So sometimes people have balance sheet partners for when they publish a report. And I don't know if that's fully understood by like people outside the activist short community that sometimes if somebody's publishing a short report.

Uh, they don't have a position just themselves. They might be working with another hedge fund or another entity who's also taking a position and then sharing some of the profits. You know, I think that's legal, but I don't think there's a huge precedent to say whether or not that's allowed. And I think that'll depend on a lot of other factors. I think that's an area of regulatory uncertainty to me. And

that that that's something that if you do it the wrong way where somebody's supplying the work for you, controlling the timing of when the report comes out, you're getting facts wrong, you're exaggerating things and you're trading within like a twenty-four hour time period after the report.

um and selling all your position or covering all your position, if you combine enough of those factors, you know, you go from something where you're hopefully doing something intellectually honest and good for the markets to something that's really dishonest and bad. Uh that's what kind of scares me. And and if there's no oversight and no regulatory clarity on that, I think you're gonna see people go into murkier, murkier waters when it comes to that sort of stuff.

Okay, so what you're essentially saying there is that some um uh you know, if a firm has a short uh research piece, they might tip off their hedge fund buddies before releasing it to the public. Is that right? No, I I wouldn't I I wouldn't say like tip off. I would say some people, if you don't have a lot of capital to bet on something yourself, you're gonna you're gonna give probably the full report to a hedge fund in advance.

They're gonna formally take a big position in the three days up to you putting out a report. And then once they profit off the stockfall, you'll have like a profit sharing agreement where it's not just you're tipping them off to help them make money, that you're primarily making money from what they make and them sharing it with you. Does that make sense, Sarah? It does make sense. Yeah, yeah, I follow. Okay.

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One of the things which I think might be interesting to speak with you about is just some of the misconceptions around short selling. So obvious with some of the recent events we've seen, uh, there's been a massive influx of retail participants into the market. And I can't help but feel that there's probably

quite a bit of misunderstanding about the mechanics of short selling. And there's probably a lot of, you know, these new retail investors who are reading things online that aren't entirely accurate. What are some of the big misconceptions that you've seen or you hear about uh amongst novice investors when it comes to short selling?

There seems to be like a weird perception that if you if the short interest goes above a hundred percent of the float, that's a sign of like very bad actors or something must be wrong. How can you go over a hundred percent? Uh there there's nothing like magical uh in it the difference between having 98% of the float shorted and 102% of the float shorted. Both are just very high numbers, but nothing weird is happening once you cross the 100% threshold.

It's just that sometimes you you buy a stock, you lend it out to a short seller. So the short seller sells it onto the market. And then the person who buys that stock that a short seller lent out also lends it out. Um, but in theory you could have an 800% short interest and now it'd like get really wacky, but there's nothing weird about crossing the 100% threshold. Um, in particular, that means there's like any sort of malfeasance.

I think n some people like to talk about naked short selling, although I I I don't think that's like a serious thing. in the markets or like failure to delivers. There's one firm that like keeps putting out this like weird daily short interest data. And I think they just keep getting things wrong because the official statistics are released every two weeks.

So I'm really confused by that. Though those are some things I find interesting. And then the huge secret I think in the financial services industry is all these like prime brokers make a ton of money off short lending. So if there's an ETF or a mutual fund or a hedge fund that owns a lot of stock, they're going to want to lend it out of sh to short sellers to like collect fees.

from lending the stock out. And places like Goldman Sachs, Morgan Stanley, I think they take like thirty, forty percent of those fees. And for retail investors, I'm assuming it's even higher. So that's how like a Robin Hood can make a lot of money by having stock lent out of its users and not compensating them for it. That's kind of an industry you're never going to get people to talk about because it's so profitable and it's so unregulated that like no one wants to kill the golden goose.

Um, that's also part of the reason ETFs can have such low fees or can even see their fees go negative. Because if there's an SP 500 ETF, that ETF isn't just making the one or two basis points on all their assets. They're also making a ton of money lending out the shares within that ETF. to short sellers. Now most of the time like you might only be getting a quarter of a percent, a half a percent, but that's gonna make a huge difference if you have a huge asset base.

Can we just go back to your example of Having a short interest that is above one hundred percent of the flow,'cause this is something I struggle to get my head around a little bit also. Can you just really dumb that down and explain how it's possible to have a short interest that's greater than a hundred percent of the float? Absolutely, Aaron. So

There's a company, they have a hundred shares outstanding that are all owned by individuals. Uh what a short seller does when they want to short a stock is they'll find somebody who owns the stock. Hey, you own 10 shares. Uh I come to you and I say, hey, I'm gonna borrow your shares. I'm gonna sell it. Uh and I'll basically give you like an electronic certificate saying you own these shares and I'll return them to you at some point in the future if you want it back.

So now the the the total like kind of float, the shares outstanding has like increased, right? It's gone from a hundred to a hundred and ten. And then the negative amount of shares owned by the short sellers is now negative 10. But what could happen is that the person who goes and buys that stock that I just sold, the person who is like the real voting shares of a company, they can also lend it out to somebody else.

So then the person who buys essentially your shares from the short seller who sold them will lend it out and they'll get another like electronic certificate IOU shares. And and you can just repeat that process ten times and now the number of shares outstanding has increased um Now the dumb the short interest is increased above the float if one share is just lent out enough. So it's not like a share can only be lent out once.

The same share can be lent out five or six or ten times. And in fact, that's almost certainly happening in a lot of cases without people knowing. Okay, so just so I understand this correctly, you're saying that if let's say there's a hundred shares in a company. You have ten of those shares. I borrow those ten shares from you. I can then lend those tan shares out to someone else. No, no, you you it you're borrowing them to short them, right? Yeah.

So you borrow them from me. You're not lending them. You're selling them. You are selling them. somebody who now owns those 10 shares. Now that person who bought the 10 shares from you, they they just think they have they have just real normal voting shares. What are they gonna do? Well they might lend it out to another short seller, right? Uh I'm following you. Okay. Okay. So if that happens, you know.

on average more than once for every share, then the short interest is above a hundred percent. So there's no real difference between ninety eight percent and a hundred and two percent. It's just that In in normal markets, some shares are being lent out more than once. So the number of voting shares is always the same. The shares that are going to receive direct dividends and have the ability to like vote in a proxy battle is the number of The same.

But sometimes the total share count will look much higher than it actually is because short sellers will own a negative hundred percent stake in a company. So it's like kind of weird for heavily shorted companies. You might see institutions actually own more than one hundred percent of the shares outstanding, be short sellers will own like a new negative twenty percent of the shares outstanding. You get into some like really weird funky stuff when the short interest is high.

Um, but the number of voting shares and the number of shares that receive dividend payments is always the same. Okay. That's a good way of explaining it. And so so so like something that I find interesting is like what would happen if there's like a really heated proxy battle in in a company with a really high short interest because

You know, you can't vote the synthetic shares, you can only vote the voting shares. And, you know, a bunch of people probably don't even know their shares are being voted out. I I I think that could be come confusing. These synthetic shares that some people like will hold without even knowing they've lent them out to short sellers, they they receive, you know, dividends in lieu instead of actual dividends, which can have like weird tax treatment.

Um, so there's a bunch of weird stuff that goes on with like the mechanics of shorting um that I think people don't know about, but no one wants to like talk about it or explain it because the these prime brokers make a ton of money. Off lending high short interest names, like a ton. Um, and no one wants to break that golden goose.

So with the example of GameStop, right? I mean everyone's I don't know, probably sick of hearing about this, but I know I am. In the example where there was uh you know, the name we keep hearing, Melvin Capital was heavily short this uh this stock. And A lot of uh retail investors who are new to the market keep sort of pushing this agenda that they were trying to, you know, bankrupt the company and drive their stock price down be uh by being heavily short the stock.

I mean, is that viable? Is that the case? I mean, they weren't going out, uh, from what I understand Saying that uh like publishing short research or trying to get everyone else to sell the stock, I mean, they just had a a massive short position for themselves, I I thought. I mean, is that how short selling works, that, you know, one big short seller has the power to, you know, potentially bankrupt a company and and try and drive their their share price into the ground?

No, that that like companies don't go bankrupt if their share prices fall. Companies go bankrupt if they don't have the cash to meet their obligations. And that has nothing to do with shareholders. the short sellers. Short sellers can impact the day-to-day fluctuation in the stock and maybe cause a one-month dip. But uh you know, they can't cause a company to go bankrupt. Maybe you can say a short seller is shorting so much of the stock that the company gets a depressed valuation.

And then, you know, if they're a money losing company and they were hoping to issue shares, now it's more difficult. So their funding options will be a little more limited. So so they might suffer performance-wise. Like maybe you could make that argument, but companies don't go bankrupt when the share price falls. Companies go bankrupt.

when uh they don't have the cash to meet their obligations. So if it's a profitable money-making company that they should be happy at the shares fall because they can buy back the shares at a discounted price. And look what happened in GameStop's case. It was super heavily shorted.

And they executed, they bought back a lot of stock and you know, now it's much, much higher. I I don't think there's really any precedent for a short seller like somehow torpedoing like a legitimate company because legitimate companies, if their stock is depressed, they'll just buy back the stock and you know, wait to deliver great returns in the long run. Yeah.

When it comes to your research process, I'd like to just sort of dive into this a little bit more. What often tips you off that something might be a little bit fishy or something maybe, you know, problematic at a company?

So Aaron, uh like you, like your podcast, I'm a big Twitter user. Uh I'm on Twitter all the time. I follow a lot of people. I tweeted fair amount, but I you know, I Uh uh I I use Twitter a ton and anytime somebody tweets something interesting about a company, I have like a word doc, I put it in.

which is my working list. So Twitter is a big source of ideas for me. I like to talk to people, just being out in the real world when I see a friend, like, hey, do you know any sketchy companies? I read a lot of online complaints boards. That's partly how I come up with things. Yeah. Talking to people, Twitter, I read a lot of SEC comment letters, which are informal correspondence between the SEC and publicly traded companies.

People don't use them enough. They're a little tough to find on Edgar. They're tough to navigate. But if you read like all these informal correspondence letters, like occasionally there's gonna be like a really good one where the SEC says, Hey, it looks like you're misstating these metrics and your CFO forgot to sign a statement. Oh, and by the way, you're doing something that like

Is questionable from a revenue recognition stance. And you can see the company's responses, and sometimes they aren't good. That causes me to dig in. And then the one thing I do that's fairly different, Aaron, from other people is I file a lot of FOIA and public record requests for consumer complaints against companies to get a consumer's perspective on what's going on. Because at the end of the day.

You know, companies with happy consumers will do well and companies that piss off customers are gonna do poorly. So I look a lot at the customer satisfaction angle to when I start digging into something. You said uh S E C was it comment letters? Ja. Yeah, SEC comment letters. Uh you said that can be a little bit tricky to find and navigate. Do you have any tips for you know, if someone's listening to this and wants to dig into the comment letters of a particular company?

Yeah. So you uh you go to Edgar, you type in the company's ticker, you go to their Edgar page, and then what you do to find the correspondence between the SEC and a company, it's not you don't look for a 10K, you don't look for a 10 Q, you don't look in an 8K. You type in CORES, C O R R E S P. That's kind of the code to bring it up. And then you can see all the informal correspondence between the SEC and that company.

Um, and I find those hugely, hugely, hugely helpful. Ninety percent of the time it's like boilerplate stuff or like minor questions from the SEC, but every once in a while you'll find something really juicy that's interesting. How much time would you say you spend uh going through those? Uh it could be like five hours a week. I think the SEC sends a few hundred of them.

every week. So so there's a there's a tool I use a lot called the SEC full text search tool, which allows you to search like every SEC filing for the last 20 years where you can put in particular words. So I'll search like every comment letter released in the last six months that uses the word auditor or uses the word revenue recognition or uses the word fraud and then I'll like sift through those.

You know, a lot of times you'll see these US listed Chinese companies that have like glaring red flags. Um, but that's kind of how I'll go about them, rather than going company by company looking for comment letters, reading the comment letters to start. And letting that be kind of like an idea origination point. And the nice thing about doing that is you're really gonna get off the beaten path ideas.

In in the markets, there tends to be a lot of groupthink. Everybody's talking about the same ideas with everybody else. And then you get these heavily shorted stocks. and because everybody knows about it, it's not as good of an idea. But when you start with these comment letters, these just like source documents from the SEC, you can find like off-the-beaten path stuff, which is much more my style.

Being a short focused researcher, well, as I've learned just uh as of about what forty minutes ago that you have also previously published uh long research, but for the most part Uh your research is more short focused. How do you not get caught up in having a bias? Well, I I think the key is, and it's easier for me because I'm not shorting and I don't view my stuff as outright short recommendations.

Uh is just being intellectually honest. Like it I I usually don't attach like a price target or say sell or like. Do stuff like that. I'm not using bold or red letters. I don't feel like I need to move the stock. So uh I just being intellectually honest about things. um is critical. So I think sometimes people will see me write a thousand word article and I won't be that critical on a company and I might just narrow in on a small issue because I don't think there's a ton to criticize.

The other thing is I usually am working on a lot of things at once. Like I have a lot of ideas in the background. So if I start to dig into something. And I don't think it's actually that bad of a situation or I don't think there's too many problematic things there. I can just ditch it and go on to look at something else where I might find something more problematic.

Um, so so being able to give up ideas really quickly if they aren't panning out and being able to be intellectually honest if what you find isn't actually that problematic. Um, those are two, I think, key factors to building credibility and not coming across as too biased.

What do you commonly see as red flags that That may not be obvious red flags to less sophisticated investors. Like I presume going through these SEC comment letters and some of the complaints which you look into Uh, you know, it's I imagine some of it's quite heavy reading. You know, your average investor who doesn't spend, you know, a lot of time, you know, uh doesn't go to the same lengths as doing research as you do.

Uh may not pick up on some of these what seems like an obvious red flag to you. Yeah. Uh I would say one of the first things I look at is executive turnover. Insider score is a tool I use to like look at this quickly. But I I'll just quickly see like how many CEOs has the company had in the last five years or ten years? How many

CFOs, how many chairmen have they been through? How many board members have resigned? And if it's like a company has had four different CFOs in the last five years, it's like that's a little bit of a head scratch or that's problematic, especially if one left uh after a little less than six months.

Um, and you know, if if there's something there with a lot of turnover, then I might look at auditor turnover and see who the auditor is because if the auditor is also turning over a lot, that isn't great. I I like to dig a lot into executives histories. Um uh as a way to see whether or not there there's red flags with management. What I do is a little different than most people. I wouldn't use a Bloomberg terminal. I I again use the SEC full text search tool.

put in somebody's name and see like every time their name has been mentioned in an SEC filing in the last 20 years. And from there you can see any time they're like an executive and see how those companies performed. You can also see any time they were a shareholder or on the board with the company or affiliated with the company. And you can see how those companies perform. Because sometimes you'll see somebody who's like CO of a small public company.

Or on the board of a small public company, put in their name, and then like every other company they've been affiliated with has gone to zero or has gone down 90%. And you're like, Huh, you're probably not a first tier guy. And if you're associated with this company, it's probably not a first tier company. Uh and and I the thing that like I like to spend a lot of time on is I don't look too much at the numbers and financial statements. That's less my style. I really try to drill down.

into consumer happiness. So looking on Twitter, on Facebook, on Google, and then through public record requests for consumer complaints on a company. And I think you can find a lot just by like looking online and seeing what the customer l customers writing online because you know, I don't just look at the star ratings. You try to see like what is upsetting.

a customer about this company. Is it that they're like overbilling and it's like impossible to get them to stop charging your credit card? That's like really problematic. Is it like just like a frivolous complaint? Um, that that that's like less of interest. Uh So the turnover, looking at auditors, looking at consumer complaints, looking at executive work history over time. Um, and and then the last thing I usually do.

Is I like to watch a CEO interview. And if a CEO is using a lot of buzzwords or just difficult for me to understand. That that's a pretty big red flag to me. Like peep we aren't stupid. You know, your listeners aren't stupid. If you listen to a CEO for five, 10 minutes and you actually don't understand it, there's probably a reason for it. And it's not because you're like, Just like

Your your brain isn't good. It's because the the CEO, you know, d is hiding something or like you can't say explicitly what they're doing because it's a little unethical. Like Malenkrot's CEO. He would always give long rambles about the pharmaceutical industry and creating value when in reality it's like.

Like we bought a drug and we increased the price a thousand X and we increased the price like 20% every year because like there's no competitors and that's how we make a lot of money until the government's gonna like pressure us. Um so those are the things I look at, Aaron. So all of those s things seem like uh really obvious reasons for why you would do that. Maybe the one that was a little bit less obvious is what's the importance of looking at turnover and and resignations? Like why is that?

uh worthwhile digging into. Well, usually that's kind of the first thing you'll find problems. Like if the accounting's sour An honest CFO is just gonna leave. You're not before the numbers start to turn. Um it if a board member is resigning after less than a year, it's usually not for personal reasons. It's usually because of a severe disagreement over something. Um, but that thing just hasn't been made public yet. So you don't know what it is.

So anytime there's a lot of turnover, it's like, well, there's gotta be a reason for it. No, people aren't just leaving their high-paying great jobs for no reason. Also, like a CFO leaving to join another company, I'd view very differently than a CFO just leaving for like Unexplained reasons. Um, but but there's always a reason behind a departure and uh I I view it as really problematic, especially if you have multiple leave people leaving after joining for less than two years.

Okay. And the reasons for them leaving, they aren't always disclosed, are they? Well, usually it's disclosed as personal reasons and nothing to do with like a material disagreement with the company and he's just gonna pursue new opportunities. And that might be true, but you know Why would you join somewhere, move your family there and then quit within a year and a half if you don't have another job lined up? It's like

So you know, it might be that you got fired and you're a bad executive. It might be that there's actually something wrong with the accounting. And as CFO, you don't want to sign off on it. Like I think a big tech company, Okta, um The their CFO resigned after like 87 days. And it's like, wait, you just joined a$20 billion company for a great new CFO gig and you're resigning before

you even sign off on one quarterly result. Well it's probably because you don't want to sign the document because you're afraid under Sarbanes Oxley you could get prosecuted for like false results and that's why you're resigning. So I I view these resignations as big red flags.

Okay. Are there particular types of companies where wrongdoing is more prevalent? Ooh, um I don't know. It's it's like, you know, private prisons probably have like a lot of complaints against them. I think generally Sub five billion dollar market caps are where you're gonna get juicy stuff and sub one billion dollar market caps is gonna be where there's like the most extreme misconduct.

Because to get to be a 10 or 15 or 20 billion dollar company, you need institutional support. You need people who are actually doing a lot of real work on you. But there's a lot of wrongdoing in like the sub$1 billion space where you could be like a little bit of a joker just.

pre playing off retail, be highly promotional, and just like do your thing for as long as you want. Um, so I wouldn't say necessarily types of companies. It's just like the small and mid-cap space is where you're gonna see the majority of like misconduct. Why do you think uh particularly in that space like the sub one billion dollar space? How does how does so much of this I I don't know if you want to throw around the word fraud, but just misconduct, how does that go unnoticed for so long?

Uh well I I think part of it is you don't have a sophisticated shareholder base. Like a retail investor is just gonna see the revenue growth and the profit growth. They're probably not gonna dig into the financials too deeply. Um So so that's part of the reason you'll get away with it. Uh part of the reason is that regulators and the media and journalists are going to be focusing more on the bigger companies. Um, like

Like there's just so many small companies are less juicy, you no one's gonna dig into them as much. Hedge funds and big short sellers, uh, they're they don't really wanna do much in the sub one billion dollar space. So the stuff there is just Less likely to get noticed because there's less of a profit incentive to do it and the players there aren't as sophisticated. Um also, uh

You know, usually the highest quality people are going to be running bigger companies. So, you know, you probably get worse actors there as well. Okay. That all seems very logical.

Just to take us out here, you know, the last part of our our chat. Talk to me about your latest piece of research, which uh surprisingly is more of a long play. Uh absolutely, Aaron. Uh I'm so, you know, usually I do critical pieces on companies. I'm super, super, super bullish on Twitter. Um

Uh, I don't know when the what the stock will be at when we release this, but this Twitter's been rolling out a lot of new products that I think are like A plus. I think Spaces is a great product, I think Feats is a great product, I think them making People being able to follow topics makes a lot of sense because for new users, this can be an intimidating

experience to find accounts to follow, but when you follow a topic that you know everybody knows what topics they're interested in, that makes the platform a lot easier for new users. It also gives Twitter a lot of power to recommend good accounts. Um, the biggest thing that I'm super bullish on that I think Twitter is gonna knock out the out of the park is this thing called super follows, which they've talked about rolling out later this year, where they're gonna allow accounts.

to with more than 10,000 followers to in essence offer a premium tier of Twitter to their users. So you can say, hey, for twenty dollars a month, follow my account, my super follow my account, and you'll get blocked tweets, you'll get exclusive events, you'll get exclusive videos, you might get an exclusive newsletter.

I think that is gonna be like so, so powerful and so so good. I I I know I I think I'm qualified to give that opinion because I write my newsletter and over half my traffic from my newsletter comes. from Twitter. So of course I'll wanna make it possible to subscribe to my newsletter through Twitter and let Twitter take a twenty percent cut. And I think that's true for almost any newsletter author.

Um, and I think it's so true for online content creators, is like Twitter is your hub for everything. It's the way you get distribution. And if Twitter wants to take a 20% cut. J just so people can get your content through Twitter rather than through your own website. Everybody's gonna do that because like there's a ton of friction in setting up like payments on your own site. But if Twitter stores people's credit cards, it's gonna be really easy to

super follow people through their platform. It just like Twitter is gonna kind of ta take margin from the Substacks, the Patreons, just like any online creator. And to me, a year or two from now, Twitter's just gonna be like a royalty on the growth of this creator economy, which I think is huge and growing and as a massive TAM. And no one on Wall Street seems to be talking about it because Twitter hasn't really rolled out the super follow feature yet and hasn't recognized revenue from it yet.

But to me, a year from now, six months from now, everybody on Wall Street's gonna be saying, Hey, Twitter's got this cool super follow feature that's just dominating with creators. Everyone's using it, it's on fire, it's got a huge TAM, it's a nice royalty business. It should get a huge, huge, huge multiple on this and the stock will like go way up. And I'm just hugely bullish on it. I'm a big fan of Jack Dorsey. I'm a big fan of the product.

Uh, I don't understand why trade's at the lowest revenue multiple of like any of these social media companies. I don't understand how it's only a forty billion dollar company and Facebook's like a trillion. It just doesn't make sense to me. As you say that you don't understand why it trades it, the valuation it does uh compared to others in the space. I mean Does that concern you at all? Do you think that you are potentially missing something there?

Okay. Maybe I I don't understand it. It wasn't a great way to say it. I I kind of get it because these features haven't been rolled out and haven't been monetized yet. And Twitter's been like some people would say mismanaged a lot in the past. So so I I understand that the market probably thinks, well, these features haven't been rolled out. Twitter's execution on past things haven't been good. We don't really see it in the revenue or income statement yet. Um

So we're not gonna give it um evaluation based on it. I think that's kind of what's happening. I think I understand Twitter and its relationships with creators, I think as good as anybody. And I I'm pretty confident in it.

Is there a timeline for when this uh feature becomes available? Well, Twitter said the super follows is going to come out sometime later this year. There's there's a few good Twitter accounts that I follow that like show leaked content on this. I I think it'll be coming out in the next few months. A lot of the other features ha that have been rolling out um have already occurred.

like Twitter Spaces came out earlier this year. But I it just I think people on the outside Aaron completely missed like how good Twitter's been executing on this. So when Clubhouse came out People were like, oh, it's cool, it's innovative, like this little audio stuff is gonna be a big new thing. And I'd host clo clubhouse events with people and I'd promote it and I'd get like 60 or 80 listeners. I'd hope to host the same event at the same time with the same people.

but i'd do it on twitter and i'd get like six hundred listeners literally ten times as much because Twitter Spaces is just like the right platform to host these type of audio events. And like you can advertise stuff like my own newsletter in the event, which is super powerful. Um Uh so so super files to answer your question is sometime in the next few months. Um I I I just really like the technology things they've been rolling out. Um and I I don't think people uh outside Twitter.

really understand it. And if you follow a lot of these Twitter accounts, I follow all the Twitter employees, all the people who report on Twitter, you'll like, you've noticed a change over the last six months where they're tweeting and they're excited about stuff and they're excited about new projects. Um, I think it's just something the market is missing.

Okay. So as someone yourself who currently publishes a newsletter on Substack, would you consider potentially moving your business to Twitter superfollows? Yes, a a hundred, a hundred percent there. And so right now I pay zero dollars to Twitter. I could easily see myself paying a hundred grand a year, like a year or two from now in royalties to Twitter because

You know, you creators wanna have be have a close relationship with their customers. I wanna do everything I can to be close to my readers. So I would love it if people can super follow me. Right now I charge 44 a month or 440 a year to subscribe to my newsletter. And then you just get my newsletter through Substack. I would love it if I could say, hey, for$44 a month or$440 a year, super follow me on Twitter. You'll get the newsletter, you'll get the Substack.

But you'll also get protected tweets. So I can send tweets exclusively to my paying subscribers. Also, I can host a live spaces event when I want. So I can have like just an impromptu or scheduled event with my subscribers. Um, I could also probably advertise it more easily on Twitter once they roll that out. It's also gonna be easier to convert people to paying subscribers because instead of saying, oh, come to my Twitter, click this link, come to my Substack, enter in your credit card.

You're just gonna have your credit card stored with Twitter and I'll just say click the one clink to super follow and start paying me. Um, so so Twitter's kind of like, you know, it's not gonna just be newsletter authors who wanna be close with their customers. Maybe Aaron, you will have a super follow version of your podcast where you, you know, people can pay five dollars a month.

To get the podcast, but also get behind the scenes footage and tweets and stuff like that. It's just like Twitter's the right platform for this. Um, I totally see myself using this. I know other newsletter authors are thinking of using it, especially if you can integrate it with Substack well. Um, yes. Right. You're gonna can I say one more thing, Aaron, on it? I know I'm ranting but I'm passionate about it. I can tell.

Th there's there's like some of these trading accounts. And what they do is they have a free tw Twitter account where they're tweeting all their like kind of ideas in real time. And then they also have a premium locked Twitter account.

Where what they do is they say, Hey, DM me, I'll set up like a$50 a month recurring bill for you on some like other platform, and then I'll let you follow my locked Twitter account to get exclusive tweets. So basically, before Twitter has even rolled out this product, People have naturally made a super follow environment because it's just the perfect platform and the perfect like

product market fit for it, which is kind of nuts when you think about it. People just creating a big free Twitter following, then having a locked account they promote and billing people off-site. to follow the locked account. It's like it's such a good product market to fit. This has naturally evolved in the wild where people have created these businesses on Twitter and they just haven't been able to build through the platform. So I think you'll see a lot of these like online traders.

just say, hey, instead of saying follow my free Twitter account and then promoting a paid blocked one where I need to bill you off site or promoting like an like a Discord room where I pay you to join, it'll just be joined directly through Twitter. Um which makes all the sense in the world.

So you're laying out a very enthusiastic, a very bullish case here for Twitter. What about on the flip side? Do you see any um you know potential issues for the company coming up? Well, the execution is always a question. So the execu to me, the execution and integration are gonna be two critical things. You know, they acquired this company review, a newsletter startup.

I don't think they've been I think they've improved a lot. I don't think it's as good as Substock. If you want to start a newsletter, you probably want to start it on Substock and not review. Uh I I think based on like the leaked documents people have been like publicly posting on Twitter, it looks like you'll be able to link a super follow to a substack or external content, which to me is critical.

Like I think it would be bad if they say, hey, you can create a super following, but you can only use our newsletter platform to sell it and like. you know, and then if they don't improve the newsletter platform, no one will want to do it. And then it creates like two separate workflows. Now it'd be weird. Um so execution has been a problem. I I do kind of worry of worry of it getting acquired. Like

Uh I I think it because in the past it it it's been on the auction block and uh I I I just see it as having a huge runway and like is one of these companies that could 10x over the next five years. I would be really sad if it got acquired. Why would you not like it to be acquired? Oh, he's like, you know, Aaron, between me and you, I'm not saying your users should do this, but I own like call options expiring in 2022 and 2023 at like the$150,$145 strike point.

Um, like I'm really betting on this, really turning around in a big way. If it got acquired for eighty, I'd be like curious because not only are my options not worth that much, I think the stock has a ton a ton a ton and ton of room to run. Um, so so I would be not too happy with that. Um, the last thing I'll say is I think people always like to say, oh, Jack Dorsey, he's such a bad CEO. He doesn't care about Twitter, he's thinking of moving to Africa.

And I I fully get Jack Dorsey's a quirky guy. He thought about running for New York mayor in 2013 in his 60 Minutes interview. He likes talks about his love for trains. He's like kind of like this very private, like guy. Uh, but I've watched a lot of his videos. I think he's wicked smart. The fact he's like kind of created not just one multi-billion dollar company, but two, Twitter and Square, and is co-CEO both of them and is like

Done great with both of them. You know, I think speaks to how like smart and good of a CEO he is. I Uh uh. I I I don't like the idea that, oh, like he's somehow like not being CEO of Twitter somehow, and that's like gonna lead to a huge underperformance. That makes no sense to me.

Okay. All right, well let's just make a point here that this is not financial advice, so don't run out there and and buy Twitter based on what uh you've just heard here. Do your own research. Edwin, it's been an absolute pleasure to speak with you. I've really enjoyed this. Uh if someone wants to find out a bit more about you and follow along with uh what you do, some of the research you're putting out there, uh where is the best place to go?

Uh Aaron, the best place will be to Google the Bear Cave newsletter and uh follow my newsletter there. There's like free and paid tiers. And then you can follow me on Twitter by Googling Edwin Dorsey Twitter or I'm at StockJabber. Those are the two best things Twitter at stock jobber and the Bear Cave newsletter. Okay. Do you just want to spill that out for us? S T O C K J A B B E R.

Very good. All right, man. Let's call this a wrap and um I'm sure we'll chat again at some point. Thank you very much for doing this. Aaron, thanks so much for having me on. I really appreciate it. You've reached the end of this episode of Chat with Traders, but rest assured there are more And zero. Love it if you leave a-